Europe

The Failure of the Euro Experiment in Two Charts

The launch of the euro was supposed to bind the nations of Europe more tightly together. Instead it is driving them apart. What went wrong? These two charts, contrasting the fates of Germany and Greece, tell the story.

The top chart shows economic growth starting in 2001, the year Greece abandoned its drachma and adopted the single currency. (Germany was in at the birth of the euro in 1999.)

Greece, the new darling of investors, outgrew stodgy old Germany. Money flooded in from abroad because its membership in the euro zone was seen as an imprimatur that it had joined the league of fiscally responsible nations.

The Greek miracle began to crumble in the fall of 2009, when the new Socialist government announced upon taking office that the previous government had understated the federal budget deficit. Interest rates began to rise, choking off growth.

That leads to the second chart, which shows the yield on government bonds in Germany and Greece. Remarkably, in spite of its long history of defaults and political turmoil, Greece was able to borrow at almost exactly the same rate as Germany for most of the last decade.

This March, Greek yields plummeted after the government managed to write off a big chunk of its debt. But they have already begun to creep back up because investors are worried that another bailout will eventually be required.

When investors lost confidence in Greece, private capital fled to Germany. So German yields have fallen at the same time Greece’s have soared. That helps explain why Germany appears less than alarmed by the chaos elsewhere in Europe: It is—so far, anyway—in the calm eye of the storm.

Greece probably never should have been allowed to join the euro. The tragedy is that the fumbling of the Greek crisis has caused investors to become concerned about stronger members of the euro zone. Even such countries as Italy and Spain, which would probably be fine in calmer times, are coming under suspicion.